A Key Currency and a Local Currency - A simple theoretical model and its welfare implications

Author Name KOBAYASHI Keiichiro  (Fellow, RIETI)
Creation Date/NO. August 2004 04-E-025
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Is there any welfare distortion by the asymmetry between a key currency and a local currency in international trade? Interpreting this asymmetry as an international liquidity constraint for countries that cannot issue the key currency, I show that the answer may be yes. It is shown that the country that issues the key currency can raise its level of consumption by increasing the amount of its currency held by foreigners, or in other words, by increasing its external debt.